STOCKS:
The European debt contagion remains in place, although it is on “hiatus” for the moment, China remains on a growth deceleration curve and there are concerns are of a hard landing - while other world economic data is starting to surprise to the downside. We find this rather troubling given the overwhelming bullish sentiment now extant. The US however, is better positioned than her brethern.
STRATEGY: Technically speaking, the S&P 500 remains above longterm support at the 160-week moving average at 1140; which is critical given it delineates bull/bear markets. However, prices have reached just above our 1350-to-1370 resistance zone - which appears to be a tradable high. Expect a correction of -4% to -8% to between 1320-to-1265 zone. Thereafter, expect a rather weak and divergent to higher highs.
WORLD MARKETS ARE CORRECTING THIS MORNING as the news du jour is Chinese Premier Wen Jiabao cut China’s 2012 growth target to 7.5% from 8.0% that has been in effect since 2004. The long and short of this is that China wants to transition from an export-investment economy to one that is more focused upon boosting consumer demand. We applaud China for doing so, for it has been a long-time coming, but they really have no choice given the extent of the mal-investment in infrastructure – they very simply must start using the stuff that they’ve built over the years. This transition will be fraught with potholes, and their real estate and housing markets shall cause them a great deal of pain.
To this end, we should note that during the Lunar Year holidays, there were no home sales in Beijing. And, home prices have rolled over and are flat and are falling in many provinces. To put numbers to this, China’s National Bureau of Statistics notes that of the 70 cities it tracks, “none” saw gains, with 22 showed little
change, while 48 showed lower prices. If the US understands anything at this point, it is what havoc a housing implosion can wreak upon one’s economy; much less one that is centrally planned given the wrong incentives.
Therefore, we are fearful for China – and its impact upon the world economy and its markets. China’s Shanghai Index (page 7) has reflected this concern for over the past year, with it falling from a high of 3187 in November-2010 to its recent low of 2133 in December-2011.
Now, it has rallied rather sharply in a mean reversion exercise back to its 200-day moving average at 2481…and has thus far failed at this key level. We shall be watching carefully just how China trades in the days ahead as it has now put itself front and center into the trading world.
TRADING STRATEGY: We’ll keep it simple again today: there is very little difference in our market outlook at this point. Last Wednesday, the S&P 500 forged a bearish key reversal to the downside, and with complacency at very high levels – the risk-reward remains for lower prices given. Our shorter-term models are at overbought levels and signaling that the rally is being held up by fewer and fewer stocks; a bearish development anywhere and everywhere.
Therefore, a correction of -4% to -8% correction is anticipated, which puts the S&P with a zone of 1265-to-1320. If we had to err upon a more “targeted” target price, we would narrow it down to between 1290-to-1310, which is where the downward-sloping trendline crosses in the next several weeks. However, we fear any correction will “hit” the NASDAQ 100 relatively worse, and we would expect a washout of the late longs down to 2400.
However, all is not lost yet: thereafter, we’ll expect to see prices resume their upward trajectory…possibly back towards the all-time highs at 1570 sometime in May-to-August time frame – and under the guise of larger negative divergences than currently seen.
We continue to see long opportunities in gold and energy shares; we are long the former, and we shall not be getting any longer at this juncture. On a correction in energy shares, we shall be buyers – but that time has not arrived as of yet. Also, we are rather aggressively short the NASDAQ 100 and Russell 2000; and we’ll look for them to continue their corrections. As the S&P approaches the 1320 level, we’ll be inclined to pare them back to some degree, although we’ll remain flexible given the developing market conditions at the time.
To Read the Entire Report Please Click on the pdf File Below.